Speaking of due diligence you must be careful when making a promise to purchase that you give yourself enough time to get all the documents from the vendor and that the amount of days marked in the promise to purchase for the procurement of a mortgage only begins once you have every single document requested from the vendor (for eg the rent roll, the leases, the financials, etc.)

The banks will be requesting your PNW’s which is a declaration of you personal net worth. They want to make sure that your finances are strong enough to cover the debt service should the property at any point become incapable of covering the mortgage.

Unless you have very deep pockets and do not need financing from a bank, do not attempt to purchase a building that has no tenants, because trust me, it will be a colossal waste of time. The best kind of tenant is one who has great financials and a long term lease. Here we are not talking about a multi residential property, but an industrial or commercial property. A lease of 2 years in many cases won’t cut it. The banks are much happier with 8 years and up with options for renewal. This way they know that you will not lose your source of revenue before your mortgage term is up.

I have just given you a small preview of what to expect when purchasing a commercial property for the first time. To ensure success make sure that you have a professional to guide you or at least someone who has been through this before so that they can warn you of all the pitfalls.

Having said that, rest assured that finding the right property for you can be a very good investment.

A home with a value of $500000.00 is worth approx $200000.00 in equity which you can take out. This can help you with your regular monthly expenses, allow you to take a trip of a lifetime, or simply help you spoil your children and grandchildren.
The possibilities are endless.

The old saying goes as follows “You can’t take it with you” so why not enjoy it while you are alive. Would you not rather, live life comfortably, and have the ability leave some money to your family while you can enjoy seeing them benefit from your gift?

If you want to find out more about a reverse mortgage and whether you qualify, please feel free to call me (514-892-2402) or contact me so that I can clear up any questions you may have.

Yesterday Finance Minister Jim Flaherty announced some minor changes to the mortgage lending rules.

These changes which take effect on April 19^th 2010 are designed to save the general home buying public from themselves. For the last year I have been talking, writing and sometimes even scolding my clients who were trying to buy a home that they can’t afford. The erroneous mind set was that the bank had told them that according to their salary and today’s interest rates they could afford a certain size mortgage. The key words are today’s interest rates. The buyers were taking this figure as gospel, putting a minimum 5% down payment and amortizing their mortgage to the maximum 35 years. Today’s interest rates are rather low and so the buyer truly believes that he can afford the payments. The truth is that today he might be able to barely make the payments, but what will happen a few years down the road when the mortgage is up for renewal, the interest rates have risen about 2.5 -3% (which is not unheard of) and your salary has remained more or less stagnant. A standard mortgage of $200,000.00 today based on a five year rate of  3.79 % amortized for 35 years will cost you $857.00 monthly. This sounds great but in five years time if interest rates have gone up to 6.25 your monthly payments will have ballooned to $1128.00 per month costing you an additional $3256.00 after tax dollars per year. Can you as a buyer truly afford that?

The following are 3 changes the Finance Minister has introduced to the mortgage lending rules.

1)      Those proposing a down payment of less than 20% must qualify their salary against a 5 year fixed interest rather than trying to fit their income to match a lower 3 year fixed rate.

This is I believe a weak attempt to protect the buyer from himself. Firstly the 5 year rate does not represent the 2.5 – 3% rate that interest rates could jump. Even if you take today’s 2% 5 year variable rate that most banks are offering, it falls short of even a 2% increase when compared to the 3.79%      5 year fixed rate offered today. I believe that the buyer should also be qualified against a shorter amortization period as well.

2)      Those who are looking to refinance their homes cannot do so to a value above 90% of the value of their home This was changed from a refinancing loan of up to 95% of the value of their home.

Refinancing to even 90% of the value of your property usually indicates that you are in dire financial straits and would be well advised to sell your home rather than incur greater financial debt.

3)      The 3^rd change to the mortgage lending rules requires a 20% down payment on a 1-4 unit property in which the buyer will not be a resident.

Many buyers have been looking to revenue properties as an investment and given the potential rental revenue they figure that their mortgage payments will be covered. They close their eyes to the fact that these rental units could end up vacant for months at a time. The Minister by raising the down payment required is trying to make sure that the investor has to ability to weather any storm such as prolonged vacancies. I am just wondering if he went far enough by not imposing stricter qualification rules.

In any case I hope that these amendments if nothing else will make all buyers wake up and smell the coffee. Do not over extend yourselves by borrowing to the max and find yourselves a good mortgage broker who will be straight with you and warn you of all the pitfalls.

Do’s
1) If your credit is bad, go see a mortgage broker because he can best advise you what route if any to take. (If you go visit a few banks they will each check your credit and your beacon score will take a hit each time. A broker deals with many institutions and will only check your credit once.)

2) Make sure that you have some kind of credit card and bank account set up because a lack of credit can be equivalent to bad credit. (Banks want to know that you have made an effort to rehabilitate your credit and that you no longer default on your payments)

Don’ts
1) Don’t approach a mortgage broker and say I just went bankrupt a few months ago and I want to buy a house with 0 down payment. (we may be good but not that good)

2) Don’t come to your broker and ask for an A mortgage when you have no recent history (the past 2 years to be specific) of credit cards, loans, or bank accounts. I sympathize that credit cards were your undoing and that you have tried to stay clear of them so as to help your credit, but by doing this you have in fact hurt your credit. Rehabilitation of credit is key.

3) Don’t expect that a private lender will give you a loan based on a 5% down payment and don’t be shocked that the interest rates are in the mid to high teens even though the Bank of Canada prime lending rate is 2.25%. Private lenders are not a charitable society, they are a business with the goal of making money.

4) Don’t owe money all over the place and expect a bank to say sure we’ll give you a loan as well.

5) Don’t quit your job a week before you apply for a mortgage. (Banks tend to frown on people having no visible means of actually being capable of paying back a loan.)

6) Don’t ask a mortgage broker to help you refinance your home when there is hardly any equity left in the property, your beacon score is at 500, and your salary barely covered your mortgage payments before. (My advice to you is sell, sell, sell, before you lose the house altogether. Sentimental attachment won’t help you save your house.)

7) Don’t ask your broker to get the maximum loan available for your income. (Interest rates are extremely low right now and chances are that in 5 years time if rates increase at a greater rate than your salary, you will not be able to afford the same size mortgage you can afford today.)

The bottom line is that you can have bad credit and within a certain set of guidelines still be able to procure a mortgage, either from a B lender or a private lender but even these two sources, have limits as to whom they will lend money to.
A beacon score in the high 500 range is a bad credit rating. A score in the low 500 range is a baaaaaad credit rating. Private lenders are not as interested in your credit score as they are the value of your property versus the size of the loan. They after all want to feel secure that if you default on your payments they can easily recoup their money.

Remember that bad credit is not permanent, but it is up to you to take the first steps to recovery and a new home can be in your future. Speak to a mortgage broker to confirm that you are indeed on the right track.

The problem that the banks have with new immigrants for the most part is that they don’t have a solid employment record, and although they have stellar credit bureau scores in their countries of origin, they have not as yet established a credit history for themselves in Canada.

Lack of established credit and an as yet unproven employment record are certainly excellent reasons for being cautious in the granting of a loan. The banking institutions are after all in the business of making money as opposed to giving it away in a benevolent fashion. There are however several banks that are open to new immigrants and they in fact have programs labeled “Welcome to Canada”. These programs are certainly not for everyone but they do cover a large number of newcomers. There are several criteria which must be met but the banks will offer mortgages with at least a 35% down payment. This program coupled with an offer from CMHC Insurance allows a permanent resident to put as little as 5% down, and a non permanent resident can get a loan of up to 90% of the property value.
The following are some of the guidelines the banks follow in order to process a loan.

A Conventional Mortgage Financing requires that the property be:
•?Owner-occupied Purchase Financing up to 65% LTV
•?Owner-occupied ETO (Equity Take Out) Financing up to 65% LTV
•?Single Advance
•?Maximum amortization is 25 years

All applications for New Immigrants must be supported by:
•?Offer to Purchase (where applicable)
•?Copy of MLS listing (where applicable)
•?Applicants must be residents in Canada (Landed Immigrant Status) or confirm an application for Landed Immigrant Status has been made and received or acknowledged by Immigration Canada
•?Cannot be a resident of Canada for greater than 3 years

New immigrant applicants must have one of the following:
•?Satisfactory international credit bureau
•?Satisfactory letter of reference from a Bank within their country of origin
•?Evidence of liquid assets equal to at least 6-12 months principal, interest and taxes, in addition to the down payment. The investment statement or confirmation must be dated within 60 days of the application date.

Down Payment
•?Minimum down payment of 35% plus closing costs must be confirmed without recourse to borrowing, and funds must be in Canada at the time of application – Secondary Financing is not permitted

Maximum Loan Amount
•?$1,000,000
•?Maximum two (2) properties may be financed under equity lending policy provided an immediate family member resides in 2nd home and total mortgage amount cannot exceed $1,000,000

Rates and Terms
•?Conventional Mortgages
•?Fixed Rate 6 months to 7years, and 10 years
•?Closed VIRM (Variable Interest Rate Mortgage)
•?Standard Pricing Applies

Eligible Properties
•?Maximum 4 units where 1 unit is owner occupied principal residence
•?New Construction or Resale – Single Advance
Appraisal
•?Full appraisal of the subject property required in every instance
•?Title Search may be ordered by Credit Centre where deemed necessary

Insured mortgages with CMHC
As mentioned earlier CMHC will fund a mortgage to a higher ratio of between 90-95% however once again certain criteria must be met.
The CMHC may not necessarily look at your credit score but they will study your payment habits over the past year. They will examine your last 12 months payment history for things such as rent, and utilities (such as Bell, Cable, and Hydro) as well as things such as daycare. Another important item that they will look at is whether within the past year you have been able to establish certain credit lines such as savings accounts and opening up credit card accounts in good standing.

As you can see there is more than one way for an immigrant to obtain a mortgage but one must be cognizant of the fact that it is never too soon to try and establish credit.

To find out if you qualify for this or any other type of mortgage loan please contact me, or fill out the contact form on my home page at www.mortgageratemontreal.com so that I may contact you.

Le Journal de Quebec has found that Canadian banks and The Desjardins Group have gradually changed their practices and methods of calculating mortgage penalties. These changes are coming as a result of the rising number of customers who want to break their mortgage contracts so as to benefit from the lower interest rates. The change in interest rates from 6% of a year and a half ago to a 3.75% rate today could save a client almost $19000.00 on a $250,000.00 over a 5 year term .

The banks have established a practice of charging either the 3 month penalty, or a system of calculations which would determine the loss of revenue, between the higher interest rates at the time of signing, and the rates which are in force today, whichever amount is greater.

In addition, banks and credit unions also require borrowers to repay the money received in the way of cash credits, discounts in interest rates, notarial fees, and other gifts they received at the signing of the mortgage deed.

The law says?

According to Professor Jacques Deslauriers, Faculty of Law, Laval University, in Article 10 of the Act, interest is that which determines the parameters of the compensation payable upon termination of a mortgage.

“This article says that the maximum penalty for breach of contract mortgage exceeding five years may not exceed the equivalent of three months interest on the contract,” says Jacques Deslauriers, Professor in the Faculty of Law at Laval University. Law contracts difficult to understand are why banks and credit unions are capable of imposing harsher penalties.

Settings

His colleague Marc Lacoursière, also professor of Law at Laval University, adds that the Supreme Court has settled the issue in a ruling in 1986 (Royal Trust v. Potash Ben).

According to him, financial institutions have no right to raise the amount of the penalty to more than three months interest for early repayment of a mortgage.

However, this law applies to holders of a mortgage  that has been extended five years from the original date, in the same financial institution.

Borrowers who are in their first mortgage, less than five years, can not rely on this provision. They have no other choice but to abide by the terms of their act and other banking documents they signed

*( I have just been contacted by Marc Lacoursière Professor of Law at the University of Laval Faculty of Law on behalf of himself and his colleague Jacques Deslauriers also a Professor of Law at Laval University Faculty of Law. They felt that due to to great amount of people contacting their banks to break their mortgages, they should clarify their comments and expand upon the statements  for which they were quoted in the Journal de Quebec on May 2nd and subsequently in my above post of May 25th.).

First of all, to take advantage of Article 10 of the Act, interest and repayment of a loan in advance of its contractual conditions requires a payment of a penalty of up to three months of interest. A borrower (ie. An individual and not a legal person) must in fact wait more than five years from the date of the mortgage contract. If this loan is paid prior to to  five years, the borrower is bound by the terms of his contract which may provide for even heavier penalties.

Borrowers should read their mortgage contract very carefully, and determine the original date of the mortgage to calculate the starting point of  the five year period to be able to rely on Article 10 of the Interest Act ‘.

Secondly, although a penalty for early repayment (and thus the breaking of the mortgage contract) is limited to three months of interest, a financial institution can claim certain costs of administration: processing the application, notary fees , assessing the credit worthiness of the borrower and, in the case of early redemption, some closing fees. Furthermore, a financial institution is usually allowed (not considered abuse) , to recoup any interest rebates or discounts given the borrower when the loan was granted. (eg a rebate or discount of interest of 1.5 or 2 %)  if the borrower breaks the contract prior to the expiration of the agreed five year term in favour of going with another financial institution.

That is to say that breaking a mortgage contract to refinance at a cheaper rate, the borrower must assess the penalty costs that may be charged. It is generally not profitable to do so if the cheaper rate is less than 1- 2 % lower than their current rate.

Jacques Deslauriers

Marc Lacoursière

Professors of Law

Laval University

Headlines in the Montreal Gazette shouted “Montreal home prices climb”,

while the national trend actually indicated the contrary.

There has been a country wide decline in home prices to the tune of 4.1%,

yet in Montreal we have witnessed an increase of 3.2%. Can it be that Montreal has managed to escape the effects of this wonderful recession the rest of the country seems to be experiencing? Is Montreal recovering quicker than the rest of the country, not to mention our neighbours to the south, or are we the poster kids for PT Barnum who has been erroneously credited with saying “there is a sucker born every minute”.

The facts are that PT Barnum never said it, and Montreal is still mired in a recession which has blanketed the entire country.

At first glance the fact that properties have risen in price is an amazing feat, considering the state of our economy, but there is another side to this equation. Although it is true that the prices of homes sold in Montreal have gone up, the fact of the matter is that the total of properties sold has declined. As you can see there are many ways to look at statistics, for example, if I were to say that 20% of all car accidents are caused by drunk drivers, you could say that conversely 80% of all accidents are caused by sober drivers. Without looking at the other side of the equation you would automatically deduce that you are safer to drive while inebriated.

Getting back on topic, why has Montreal seen a rise in home prices? Possible answers could be that Montreal’s market was previously under valuated, or the rise in property taxes brought home prices along for the ride, because our informed buyers check out the city evaluations prior to any purchase. I prefer to think that our vendors and their over priced homes have proven that there is indeed a sucker born every minute.

Real estate agents are actually listing the properties above their real market value. In today’s competitive market they are promising the vendor, the moon, and stars just to get them to sign an exclusive mandate. A vendor looking to sell their home is not necessarily hiring the most competent real estate agent, but the one that will promise them the highest return. This of course explains the refrain heard from every agent as they hand you their listing. “Don’t worry, the price is very negotiable”. I assume that once they have the listing they feel more comfortable selling the lower price to the vendor.

The truth is that you can in many cases negotiate a lower price on the property but keep in mind that the negotiations should only be with the vendor and not with yourself as well. As I write this article you can get a five year fixed rate as low as 3.85% and a five year variable at 3.30 %. These are extremely low rates which have not been seen in years and so I feel compelled to offer you a tiny bit of advice. When you are calculating how much you can afford, do not necessarily listen to the banks when they calculate your maximum mortgage. These calculations are based on a combination of factors such as your current salary and expenses, and of course today’s interest rates. Do not entertain the notion that you can take the maximum mortgage that you can afford and all will be well with the world.

Let me give you a little example. Assume that you take a mortgage of $250000.00 amortized over a 35 year period with a five year fixed interest rate of 3.85%. Your monthly payments not including municipal taxes would be about $1080.00 per month which is pretty much the maximum that you feel you can afford. This is great because you have decided to sacrifice certain things and with a little belt tightening
you will be able to afford your dream home. Let us take a ride on my time machine and zip 5 years into the future. Your mortgage is due and you need to renegotiate a rate for the next few years. Your current mortgage is now at $231,242.72 and your amortization period is down to 30 years but wait, interest rates have gone up to 6.25%. and your monthly payments have ballooned to $1412.00 which is close to $4000.00 more per year, that you have to come up with.

The best advice that I can give you is to purchase a home that will not stress you financially. Use a competent and trustworthy mortgage broker to help you with what may well be the largest purchase of your life. Trust him to let you know what you can afford.

As a mortgage broker, a phenomenon that I have been experiencing lately, has to do with the amount of people that are approaching me to help refinance their mortgage, or to procure a second mortgage and in many cases regardless of the source of these loans. Refinancing in mid term even with an “A lender” incurs major costs in penalties. Banks will charge between 3 and 6 months interest in penalties, should you decide to break your mortgage contract. Some individuals are willing to seek out the aid of a private lender who will charge upwards of 14% on a second mortgage, not including setup and application fees that would add an additional 2-5% on top of the already high rate.

Common sense would dictate that you step back and look at your financial situation with an unprejudiced eye. You need to determine whether you are better off to pay exorbitant interest rates which you most likely can’t afford to pay, (If you could afford it, you would not be in this situation in the first place) or cut your losses and sell your house now before the debt buries you, and you have to settle for a greatly reduced price out of desperation.

I am not trying to preach doom and gloom. On the contrary I want you to wake up and realize that you could live just as well, and in many cases better, in a smaller property, or even a rental. When your financial situation improves you can once again consider a bigger and better house. Life is too short to put material possessions above the needs of your family.

What has caused this drastic change? In the case of the banks, there are several institutions that were hurt by losses in the sub prime market, which in itself could cause them to tighten their purse strings. We won’t even mention the markets dropping, causing people’s portfolios to shrink by 20 – 30 % or the investment scandals that have rocked our world recently.

The above mentioned catastrophes were horrible but let’s be honest with ourselves, the average Joe was not affected by these events, particularly not in Canada. In Canada the banks when it came to handing out mortgages were infinitely more prudent than their U.S counterparts and did not use the presence of a pulse, as a primary requisite for the procurement of said loans. In fact how many average individuals do we know who have lost fortunes in the stock market? I would venture to say that there weren’t many. As the old joke goes, when a person was asked, if they were to find $1,000,000.00 on the street would they return it to its owner, and their response was, yes if it belonged to a poor person. The fact is that the average Joe does not have a great fortune to lose, and the wealthy individual, should he lose 20-30% of his $100,000,000.00 portfolio will still have what to live on.

What has really caused this apprehension in the economy? Why are we holding onto our money, not willing to spend it and thus causing the entire structure of our economy to collapse. Everything snowballs and if we don’t spend our money, the stores won’t be able to sustain themselves, and so it goes on and on. There is an old expression that goes, “Ignorance is bliss” but today, thanks to all the media, such as radio, television, newspapers, and of course the new frontier the internet, there are no more secrets, hence no more bliss. The medias are forecasting doom and gloom and with the proliferation of information we are creating a self fulfilling prophecy.

The governments have tried to lower interest rates with an end to stimulate the economy but the fear is not enabling us to open our wallets. We can liken this to the fable of the wind and the sun making a wager as to who can remove the traveler’s coat. The wind blew as hard as it could in an effort to blow the coat off, but it only intensified the man’s resolve to hold onto his coat even tighter. The sun eventually came out, and its warmth caused the traveler to remove his coat. We don’t need fear mongering coupled with the lowering of interest rates to stimulate the economy. We need the ray of sunshine and upbeat reports to cause us to remove our hands from our pockets.

In our economy we have two opposing views of the market place, the vendor and the purchaser. In the housing market you have the purchaser who eyes the situation and thinks to himself, “Great, the interest rates are going down and the sales of houses have slumped, now is the time to get a bargain”. The vendor on the other hand looks around him and says “Wow there aren’t that many houses for sale on the market, and interest rates have gone down, so I can probably ask a higher price for my house and get it”
We need everyone to meet at a common ground and realize that today it’s up to us to stimulate the economy and not some artificial external force.